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What is DRHP?
When a company plans to raise money (for example: float an IPO) from the public by selling its shares to investors, it files and submits a Draft Red Herring Prospectus (DRHP), also known as 'offer document' or 'preliminary registration document', with the market regulator Sebi (Securities and Exchange Board of India).
DRHP, a legal preliminary prospectus, serves as a crucial communication link between the company and its investors and stakeholders.
Key features
Through DRHP, the issuer firm allows potential investors to make an informed decision and analyse its financials, issuance objectives, business operations, promoter holding, market valuation, and other important information.
The DRHP document explains why the firm seeks to raise funds from the public, how the money will be utilised (use of proceeds) and the risks involved. However, it does not include the amount of issue and details of the price or number of shares being offered.
The DRHP of a company is available on the official websites of the issuing company, Sebi, merchant bankers and stock exchanges.
Difference between DRPH and RHP
Firm planning to go public delegates a merchant banker to prepare the DRHP. The Sebi analyses the DRHP and recommends changes, if required, and then gives a go-ahead when the suggested amendments are made according to its guidelines.
After the approval from Sebi, Registrar of Companies (ROC), and the stock exchanges -- Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), the DRHP converts into a Red Herring Prospectus (RHP) which is also known as 'final prospectus'.
An RHP document comprises additional details of the issue, the number of shares offered and the face value.